If you are looking for a truly unique retirement investment plan, consider including real estate in an IRA. It’s more complicated than most other IRA types, but it also offers benefits that no other retirement plan can.
Can You Legally Hold Real Estate in an IRA?
The rules on the types of investments that you can hold in an IRA are surprisingly liberal. The IRS has just two investment categories that are not permitted to be held in an IRA – collectibles and life insurance. Other than that, anything goes.
So the answer is, yes, you can hold real estate in an IRA.
Why You Might Want to Have Real Estate in an IRA
There are number of reasons why you might want to have real estate in an IRA, but topping the list is turning real estate into a completely tax-sheltered investment.
By holding real estate in an IRA, any income on the property – or capital gains upon disposable – will be tax-sheltered. The effect that will have on income and especially capital gains can be so enormous that it will have a major impact on your investment portfolio overall.
With the benefit of tax-deferral, you will be able to convert the proceeds from the sale of one property into the purchase of another, since your capital base will not be reduced by a large tax bite.
Real estate also offers a very distinct form of diversification in an IRA. Since most IRAs – and retirement accounts in general – are filled exclusively with paper assets, adding real estate will be a way of having a true hard asset in your investment portfolio.
That can be a major advantage in protecting your retirement portfolio from inflation. Since real estate tends to increase with inflation, it will continue to grow in value all the way to your retirement years. This will be one of the very best ways to invest for retirement – with a portfolio that recognizes the reality of the impact that inflation has.
How to Put Real Estate in an IRA
The first task in setting up a real estate IRA will be finding a trustee specializing in this area. Most of the common names in the investment brokerage field that are most closely associated with IRA accounts do not participate in this area of specialization.
Once you locate a trustee, you will set up your IRA account in much the way that you would for any other type of IRA. If you are planning on using the IRA to hold real estate, it’s likely that you will be doing a rollover IRA of some sort so that you will have the type of capital that will be necessary to purchase investment property. And again, a rollover IRA – whether from a 401(k) plan or from another IRA – will happen in a manner similar to how it will with any other type of rollover transaction.
Once your account is established, you can begin the task of purchasing the investment property that you want to put into the account. And this is where a real estate IRA starts to look and act different from a regular IRA.
Any property purchased for a real estate IRA must be titled in the name of the IRA. For the purpose of a real estate IRA, it is critical that you recognize that there must be a completely separate identity between you and your IRA account. It is your IRA account, and not you, that will be legal owner of the property that it holds.
For this reason, you will complete forms directing your IRA trustee to make the purchase. The transaction must then be handled entirely by the IRA trustee – you cannot be involved in the process at all. The specific process, as well as the paperwork, will vary somewhat from trustee to trustee.
Once the property has been purchased, all records related to both the transaction and ownership will be retained by the IRA trustee.